A Question Of Ethics

Whose fault is it when properties are underinsured? The policyholder? The agent? The insurance carrier? That's the question we posed to NU readers following last year's California wildfires, for which many homeowners reportedly lacked adequate coverage to rebuild. NU's ethics columnist, Peter R. Kensicki, compiled the responses (many of them from readers of my blog) and came up with the following trends.

Whose Fault Is It When Properties Are Underinsured?

BY PETER R. KENSICKI

The issue of underinsured properties returned to the forefront in the wake of the November 2007 California wildfires. Some state officials suggested the problem arose from a lack of clarity in contract language and possible bad advice to consumers from agents and insurers. So we asked what National Underwriter readers what producers and insurers should ethically do to have properties properly insured.

Very few responding believed there was no ethical responsibility for producers to offer advice as to insurance-to-value. On the other hand, no one claimed there was any legal duty to do so, either.

One Illinois producer, while clearly stating there was an ethical duty for producers to advise clients about insurance to value, took issue with the industrys critics. Few agents give bad advice to clients about insurance-to-value, he said. Policy language is not part of the problem–no one reads their contracts anyway. How could they be confused?

Yet one Florida producer assessed part of the blame for underinsurance on producers who do not give advice. Agents must explain the importance of good value and how that value may be calculated, he said.

A catastrophe adjuster agreed, noting that agents should regularly contact insureds regarding adequate values for insured property. Another producer simply put it this way: Its the agents responsibility to remind homeowners to insure to 80 percent of replacement value.

A compliance analyst for an insurer believes that agents ethically must see that initial limits are adequate up front, offer an inflation guard, and tell the insured to report any changes made to the property insured.

Another respondent said producers should educate insureds at the time of purchase about insurance-to-value, replacement-cost provisions and options, and all available contractual automatic limit-increase options. The same service should also be offered at renewal.

This educate the consumer ethical obligation was reinforced by a Kentucky producer: Almost no insured remembers being educated by their agent. Value has many meanings to them. Any informed buyer would want to know how their property will be valued at time of loss. However, a price-shopping insured would not care.

A producer who was once a marketing representative for an insurer blames a lack of attention to the problem at the agency level: Personal service and personal contact seem to have been eliminated. This is further exacerbated by a lack of follow-up at renewal to see that limits are adequate.

An insurance executive placed the ethical and legal duties squarely on the insured: My impression is that the law in most jurisdictions is that it is the insureds duty to decide on coverage and limitsnot the insurer or the agent. The insured knows best about the values of properties in their area.

However, he partially exonerated the insured in catastrophe situations: The problem with post-catastrophe loss is that replacement costs skyrocket due to cost increases from sudden demand for labor and materials.

The Illinois producer placed no blame on insurers: Underwriters, not living in the area, have no idea of local values.

The Florida producer said that insurers have no ethical duty to the insured if the insured does not seek adequate coverage.

An extremely limited exemption to any ethical duty of an insurer was offered by the catastrophe adjuster: If the insured is informed of policy requirements, reported changes in values and had their home inspected, the insurer should do nothing pre- or post-loss.

The Kentucky producer cited no ethical duties, but said carriers or agents are part of the problem: The insurance business is more concerned with selling the price of their product rather than selling their product, properly priced. Agents also tend to rely too much on the price of the product rather than the quality of the product. There is no effort to educate the public on any insurance issues.

An Oklahoma producer indicated that the insurers he represents have already taken some action: My companies demand a replacement-cost estimator with every replacement-cost policy, and will only allow a small variance one way or the other.

As a side comment, he wrote: It amazes me how we see this problem consistently on the East and West coast, but not so much in the middle of the country. Even with [Hurricane] Katrina, the question posed most often was not one of property value, but rather a wind vs. water discussion.

The catastrophe adjuster wrote that the problem began with insurers, which started the problem with full replacement cost policies. They also offered an inflation guard to help with the underinsured problem.

A New Jersey claims consultant put insurers in good, bad and ugly categories: Good is requiring a full inspection at placement and follow up at renewal. They also ask adjusters for comments on property condition and values any time there is a loss. Bad is little or no inspection, or even photos. Ugly is when an insurer just accepts information on the application.

The Florida producer supported the consultants position: Companies must get realistic values, use inflation guard as part of the policy–or at least as an option–and use renewal questionnaires to get value information. He also–as did most respondents–put part of the responsibility on the consumer.

The compliance officer believes insureds must report changes to the property, have an agent physically review a renewal, and call for an update when needed. This was supported by the Illinois producer, who suggested that the principal cause of underinsurance is the failure of the insured to report improvements.

Another producer noted a problem in dealing with insureds: Getting a homeowner to accept suggested limits or do an appraisal is like pulling teeth, only the sound is worse!
Another adjuster summed up all comments toward insurers and insureds: Insurance is like the police–you dont want to deal with them until you need them. People refuse coverage increase suggestions and under-report square footage. Insurance companies do not go out and look at properties

A loss control executive echoed the adjusters comments by asking: Why havent insureds increased limits after all the stories on the news about underinsurance were trumpeted in the press? Did they pinch pennies? Did they say, It will never happen to me? Why didnt insurers inspect to see if homes were insured for value?

In summary, those commenting on the ethical duties of producers uniformly agree that valuation methods must be explained to insureds, automatic coverage increase options should be offered, and insureds must be instructed to report changes made to properties that affect values.

Insurers should require some verification of values, with appraisals the best option. Insurers should also offer automatic value increases.

Ethically, consumers must give accurate information about their properties and, if needed, seek assistance in helping determine values.

(Peter R. Kensicki is a professor of insurance at Eastern Kentucky University in Richmond, Ky., as well as a member of the Ethics Committee of the CPCU Society in Malvern, Pa. He may be reached at ethics@eku.edu.)